In the case, Hedley Byrne (claimant) was considering to supply advertising services to Easipower on credit. Thus Hedley asked for a credit reference from Easipower’s bank, Heller & Partners (defendant). The bank replied that Easipower was financially sound, but with an exclusion clause stating “WITHOUT RESPONSIBILITY” at the beginning of the reference letter. But Easipower went into liquidation shortly afterwards, causing great economic loss to the claimant who has relied on the reference provided by the defendant and did business with Easipower on credit. The House of Lords held that “the defendants would have owed a duty of care to the plaintiffs and would have been liable but for the disclaimer that heir remarks were made without responsibility.” (Deakin, S. et al, 2003, p.114) Although the claimant did not actually get the compensation, it showed the possibility to act against a negligent misstatement causing purely economic loss.
Before the case was held, liability for misstatements was traditionally aroused only for breach of a contractual undertaking. However, since the Hedley Byrne case, it showed that tort law has recognised liability caused by careless words, although the relationship between claimant and defendant needs to be carefully considered. Lord Reid stressed in 1964 that there is a need for a control device to deal with the threat of indeterminate liability. “Words can be broadcast with or without the consent or the foresight of the speaker or writer.” (Deakin, S. et al, 2003, p.115) He suggested three limits. The statement should be given in a professional context; that the provider knows that the statement will be relied upon so a responsibility is undertaken; and the receiver acts upon the statement. (Source: Deebank, S. Handout, p.3) Once all these limits are satisfied, the defendant should be held liable in negligence. Thus in this case, although the defendant avoided liability simply because of the exclusion clause, and the claimant did not pay the defendant to get the information, but as a bank, Heller & Partners possessed a special skill and should have known that Hedley Byrne was relying on it. The claimant may not get the business without the reference letter. It is then arguable that the claimant reasonably relies on the defendant.
The pre-condition of the existence of liability in the Hedley Byrne case is the “special relationship” between the two parties. (Conaghan, J. & Mansell, W. 1999, p.23) Lords Delvin and Morris argued that as long as the relationship is “equivalent to contract”, the relationship should be recognised, and thus exists the liability of the defendant. The significance of this case therefore lies in its general approach to the question of how the existence of a duty of care ought be established in general.
During the 1970s and 1980s, the judicial tendency was towards recognising when there is a duty of care. Like the Hedley case, Smith v. Eric S. Bush (1980) was also close to contract, but an even stronger case according to Lord Griffiths. Since an exclusion clause may allow defendants to avoid being liable, the Unfair Contract Terms Act 1977, which “regulates exclusions of this kinds” was referred to in this case. (Deakin, S. et al, 2003, p.121) The House of Lords held that the duty of care did exist, since the surveyor should have known the purpose of the report and that in most cases, ordinary buyers would not carry out a survey independently. Although the report contains an exclusion clause, it was ineffective under the UCTA 1977, as the two parties were not of equal bargaining power, and thus it would be unfair for the individual purchasers to suffer economic loss caused by valuers’ negligence.
In the 1990s, in order to prevent the defendant being held liable to a large amount of potential claimants, the House of Lords re-examined the Hedley Byrne principle. In Caparo v. Dickman (1990), a case which was in contrast to Smith v. Bush, and “tightened the rules”. (Adams, A. 2003, p.156), the House of Lords held that no duty of care was owed by the defendant, since the primary purpose of the account was not for guidance of personal investment. The “Caparo test” was introduced, stating that a duty of care in misstatement would only arise when the person making the statement is fully aware of the purpose of it; that acting on the advice given in the statement without further independent research is reasonable in the circumstances; and that this is to the advisee’s detriment. (Deebank, S. Handout, p.4) The test was applied in Morgan Crucible Co, Plc v. Hill Samuel Bank (1991), where the defendant was held liable since the claimant had satisfied all three aspects of the test.
In conclusion, the claim on economic loss is generally becoming more and more detailed in order to deal with increasingly complicated cases. With the Hedley (1963) case, the law started to recognise the possibility of recovering pure economic loss, particularly in relation with the negligent misstatements. The development with two other important cases involved, Smith v. Bush (1989) and Caparo v. Dickman (1990) has added further detailed to the rules, making claims for economic loss more recognisable. It shows the tendency that the courts will scrutinise more closely the relationship between claimants and defendants in future cases. Since in Hedley Byrne, the duty that arose when there was a relationship equivalent to contract was the main condition of such claims to succeed. Clearly, the role of contractual standards is extremely important, as it helps to “shape the scope and level of tort obligations”. (Deakin, S. et al, 2003, p.148)
References & Bibliography:
Adams, A. Law for Business Students, 3rd edition, 2003, Pearson Longman.
Conaghan, J. & Mansell, W. The Wrongs of Tort, 2nd edition, 1999, Pluto Press.
Cooke, J. Law of Tort, 6th edition, 2003, Harlow Longman.
Deakin, S. et al, Tort Law, 5th edition, 2003, Clarendon Press, Oxford.
Deebank, Sue. Handout on “Tort Law, Negligence”, 2004, Unpublished.
www.lawecon.findlaw.com
Donoghue v. Stevenson 1932: it is a landmark case in which the claimant Mr Donoghue is the ‘ultimate consumer’ of the product who is owed a duty of care by the manufactures of the goods. The claimant is the actual user of the product, who “is not necessarily the buyer”. It was held in the House of Lords that the since Mrs Donoghue is somebody who is reasonably foreseeable would be affected by the negligent act, the manufacture owes a duty of care to her. (Adams, A. 2003, p.141)
There are two distinct liabilities while considering claims on economic loss, one from negligent misstatements, particularly those which “take the form of advise to the injured party”; the other from negligent acts, or sometimes called “omissions”. (Conaghan, J. & Mansell, W. 1999, p.23)
Lord Delvin claimed that :”Now that the categories of special relationships, which may give rise to a duty to take care in word as well as deed, are not limited to contractual relationships or to relationships of fiduciary duty, but include also relationships which hare ‘equivalent to contract’, that is, where there is an assumption of responsibility in circumstances in which, but for the absence of consideration, there would be a contract.”
Lord Morris stated that to the effect that a duty of care will arise where “a person takes it upon himself to give information or advice to, or allows his information of advice to be passed on to, another person who, as he knows or should know, will place reliance on it.” (Deakin, S. et al, 2003, p.115)
In the case, a surveyor provided a valuation report to a building society for the purpose of purchasing properties. The claimant relied on the report and made the purchase, only to find that the report failed to detect a structural weakness in the property, which later on damaged the rest of the house, causing the claimant great economic loss for the depreciation of the property.
Unfair Contract Terms Act
The claimant in this case was a shareholder of a company, who had received an annual report of the company prepared by the defendant, the accountant of the company. The report showed that the company was doing a good job, and thus the claimant increased his stock of the company’s share. But as the report was negligently prepared, the claimant paid above market value for the shares, resulting in a great economic loss.
The claimants made an investment decision relying on a profit forecast provided by the defendant. Both the bank and defendant accountant knew the purpose of preparing this document. But because of the their negligence, the claimant suffered from great economic loss.
